Research your way to less volatile long-term wealth

Australians are big fans of the sharemarket. According to the most recent Australian Securities Exchange Share Ownership Survey, in 2012, 38 per cent of adults owned shares, or 6.7 million people. That is the third-highest rate of share ownership in the world, behind the USA and Hong Kong.

They are fans for a good reason – shares have proven to be a sound investment. Since 1983, according to research house Andex Charts, the S&P/ASX All Ordinaries Accumulation Index (which counts capital gains plus dividends) has delivered an average return of 11.1 per cent a year, for a real return of 7.5 per cent – better than any other asset class.

Since 1963, says Andex Charts, the Australian sharemarket has returned 11.7 per cent a year, for a real return of 6.4 per cent a year. More than half of the long-term return from the sharemarket comes from dividends.

The sharemarket is an efficient long-term generator of wealth, and works by compounding the value of profitable companies. The key is “long term”.

In the short term, the sharemarket can be very volatile and fall dramatically in price. Between February 2007 and November 2009 the Australian market lost 52 per cent of its value, with even its highest-quality stocks – the so-called “blue chips” – hammered.

Over that period, BHP lost 41 per cent, ANZ fell 63 per cent, Commonwealth Bank slumped by 61 per cent, National Australia Bank lost 60 per cent and Westpac plunged 53 per cent. Wesfarmers lost 63 per cent, Telstra lost 40 per cent, and the best-performed blue chip, Woolworths, managed to limit its loss to 30 per cent.

The risk of volatility is ever-present on the sharemarket – especially in the more speculative end, populated by unproven companies. Last month, shares in drug developer QRxPharma fell 85 per cent in a day after the company failed to win regulatory approval for the release of its painkiller drug, Moxduo, in the US.

In the Naked City of the sharemarket, there are 2000-plus individual stories. And not all of those perform as well as the market index. This is the paradox of sharemarket investing.

Two markets

Put another way, there are really two sharemarkets – the long-term one, which works to create wealth, and the short-term one, where quick money can be made and lost every day on the changing share prices.

“There is no shortcut to wealth, but the really big capital gains in the stock market have been made by investors who’ve taken a long-term view in the quality end of the market, particularly the big four banks,” says Simon Bond, who runs the Newport branch of broking firm Morgans.

Bond says an investor’s journey in the sharemarket should be evolutionary, and based on reading as much as you can.

“Newspapers, websites, the internet are full of investment information, some of it better than other sources. That means there is a lot of misinformation, too. I would say that it’s a good idea to have an adviser as a sounding board. In fact, our No. 1 job these days is to protect people from themselves,” says Bond.

That said, there is a great deal of good-quality information around. Most online brokers offer a wealth of educational information and research content as part of the client package. Investors should try as many sources as possible.

Here is a sample of some of the external information available.

www.moneysmart.gov.au – financial information site of the Australian Securities & Investments Commission (ASIC), with tips and tools to help an investor make the most of their money (free).

www.wise-owl.com – independent small/mid-capitalisation company research firm, specialising in investment advice and company research.